ATO HORSE INDUSTRY RULING FINAL VERSION (14/05/08)
14/05/08

reproduced with courtesy from Paul Carrazzo, Carrazzo Consulting CPAs

MEDIA RELEASE

FINAL RULING REFLECTS ?BLOCK?S? CASE PRINCIPLES

The eagerly anticipated final version of the ATO Horse Industry Ruling (TR 2008/2) was issued by the ATO on Wednesday 14 May 2008.

The draft ruling was issued in August 2007 and many submissions were lodged with ATO providing comments as to how the ruling could be enhanced.

The most significant change to the draft ruling has been in the subjective area of ?Business v Hobby? and the ATO?s view as to the factors it will consider in deciding whether a person?s breeding and/or racing activities will be accepted.

?Block?s? principles to be considered for breeders

In this regard, the major feature of the ruling is that the ATO has lived up to its pledge and incorporated the principles of the recent landmark ?Block?s? AAT case into the final ruling. This case was decided in October 2007 and held that breeders were running a breeding and racing business, even though significant losses were present in the years under review. The breeders had experienced significant bad luck in the loss years and the case was decided in their favour due to their strong profit intention and other business-like factors present.

The ATO had noted in its ?Block?s? ?Decision Impact Statement? of December 2007 that it would take account of this new landmark case in its final ruling and, to the relief of the industry, it duly delivered.

The ruling is significant in that it indicates that, per Block?s, it is now important to consider why significant losses had been incurred when deciding the income tax status of a horse activity, especially where they occur in the ?start-up? phase. They also comment that allowance will be given for ?unforeseen? events and the ?need for appropriate business restructuring? as to whether a business can argue ?sustainable profits? in the future.

Tax practitioners will welcome this more reasonable ATO view as many have found that horse breeding and racing activities have been regularly rejected during the current audit due to the presence of losses, even where it clearly obvious that the activity is very ?business-like? and has a reasonable expectation of viability in the future.

The ATO have also modified some of the other breeding factors, noting, for instance, that mares need not be covered ?regularly?, a reflection that ?unforeseen? events, such as EI, can prevent this from happening.

Not so harsh on ?Stand-Alone? racing

There is also some encouraging news for the many high wealth individuals who conduct ?stand-alone? horseracing activities. The previous draft ruling had noted that it would be ?a rare case indeed? where such activities would be accepted without the presence of breeding. It appears as though the ATO have acted upon our submission in that we bought it to their attention that they were too closed in their view of these activities and that each case should be decided on its own merits, especially having regard to case law principles.



The ruling has removed the phrase ?rare case indeed? and noted that though there are ?difficulties? in demonstrating such a business, they may accept such an activity if it is run in a systematic and organized manner with a reasonable expectation of viability within a timeframe consistent with ?industry standards?. The challenge if for the industry is to develop such ?standards?.

Service fees in advance can be deductible

Our office also welcomed the ruling confirming that horse activities that are conducted via an eligible ?Small Business Entity? can claim service fees paid in advance, a disclosure not noted in the draft ruling. Again, this was another instance where the ATO acted on the submission of this office.

You are welcome to contact me if you wish me to clarify or expand upon any of the matters raised in this article.


End of release.


DISCLAIMER

Any reader intending to apply the information in this article to practical circumstances should independently verify their interpretation and the information?s applicability to their particular circumstances with an accountant specialising in this area.



PAUL CARRAZZO CPA
CARRAZZO CONSULTING CPAs
22 BLACKWOOD ST, NORTH MELBOURNE VIC 3051
TEL: (03) 9329 7044
FAX: (03) 9329 8355
MOB: 0417 549 347
E-mail: paul.carrazzo@carrazzo.com.au
Web Site: www.carrazzo.com.au